New Delhi, February 2, 2025 – According to a recent report by Goldman Sachs India, the Indian government’s Union Budget for FY26, presented on February 1, continues the trajectory of fiscal consolidation, targeting a reduced fiscal deficit of 4.4% of GDP, down from the revised 4.8% for FY25. This marks a key effort to stabilize public finances while addressing ongoing challenges in the economy.
The Finance Minister’s commitment to fiscal consolidation includes a firm pledge to reduce the central government’s public debt-to-GDP ratio, aiming for a 50% debt ratio by FY31 from 56.1% in FY26. The government’s approach to managing fiscal discipline has been underlined by a steady reduction in current spending, with the fiscal deficit target fully funded by these cuts.
Despite this fiscal restraint, the budget also includes relief for urban taxpayers, with a recalibration of income tax slabs providing an estimated 0.3% of GDP in tax relief. This shift is expected to alleviate some of the financial strain on indebted urban consumers, potentially helping them deleverage and boost household savings. This move could also stimulate consumption in certain segments of urban households, contributing to a mild fiscal impulse despite the broader fiscal discipline.
The budget shows a clear tilt towards supporting state-level infrastructure, with capital expenditure (capex) for states seeing a 22% year-on-year increase, amounting to 0.5% of GDP. Meanwhile, central government capex is budgeted to remain stable at 3.1% of GDP, suggesting that the central government is redirecting the infrastructure responsibility to state governments. This transition also signals the government’s strategic move to leverage regional capacities for growth.
In the defense sector, the capex allocation saw a 13% year-on-year increase, although spending on roads and railways remained flat. The fiscal constraints, however, could lead to potential cuts in capital expenditure should revenue fall short of expectations.
With a lower fiscal deficit target, the government plans to rely more on market borrowing through bonds. Despite this, there are concerns that the Reserve Bank of India (RBI) may have to act as a net buyer of government bonds in FY26. This is seen as a necessary move to counter the rupee’s vulnerability and offset liquidity drain from foreign exchange (FX) sales, particularly amid a stronger US dollar.
While the government’s fiscal strategy emphasizes long-term stability and macroeconomic resilience, the challenge lies in balancing fiscal prudence with the need to stimulate growth in the short term. Analysts suggest that the shift in capital spending responsibility to states may encourage more localized economic activity, but it remains to be seen whether this will lead to the desired growth outcomes across the country.
The Union Budget for FY26 represents a cautious but clear path toward fiscal prudence, while aiming to provide some relief to urban households and support state-led infrastructure projects. The challenge for India’s policymakers will be to maintain fiscal discipline while driving growth and development in an increasingly uncertain global economic environment.